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Devaluation, Inflation, and the Balance of Payments: A Short‐Run Monetary Approach

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  • MARIO I. BLEJER

Abstract

In this paper a model is presented to analyze, in a monetary setting, the effects of a once‐and‐for‐all adjustment in the exchange rate in a small economy committed to a fixed exchange‐rate system. The effects of such an adjustment are shown to be transitory. After a devaluation the domestic rate of inflation accelerates in relation to the rate of inflation in the rest of the world. The increase in prices reduces the real value of the nominal stock of money and, in order to restore real liquidity to its previous level, foreign‐exchange reserves start to flow into the country. However, as monetary equlibrium is reached, the flow of reserves tends to stop and the domestic rate of inflation converges to the world rate.

Suggested Citation

  • Mario I. Blejer, 1979. "Devaluation, Inflation, and the Balance of Payments: A Short‐Run Monetary Approach," The Economic Record, The Economic Society of Australia, vol. 55(1), pages 33-40, March.
    • Handle: RePEc:bla:ecorec:v:55:y:1979:i:1:p:33-40
    DOI: 10.1111/j.1475-4932.1979.tb02199.x
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    1. Connolly, Michael & Taylor, Dean, 1976. "Adjustment to devaluation with money and nontraded goods," Journal of International Economics, Elsevier, vol. 6(3), pages 289-298, August.
    2. Guitian, Manuel, 1976. "The effects of changes in the exchange rate on output, prices and the balance of payments," Journal of International Economics, Elsevier, vol. 6(1), pages 65-74, February.
    3. Johnson, Harry G., 1972. "The Monetary Approach to Balance-of-Payments Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(2), pages 1555-1572, March.
    4. Dornbusch, Rudiger, 1973. "Currency Depreciation, Hoarding, and Relative Prices," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 893-915, July-Aug..
    5. Mario Blejer, 1977. "The monetary approach to devaluation: A graphical presentation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 113(2), pages 348-352, June.
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